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Selling Your Principal Residence: Tax Exemption Obligations

Vente résidence | Fiscalité | Raymond Chabot Grant Thornton

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Updated on January 30, 2024

The accrued gain on your principal residence is generally not taxable. Be careful however as there are certain exceptions.

Without necessarily getting into the details, individuals who sell their residence know that they are no reporting requirements regarding this sale.

However, they should know that since 2016, the tax authorities have introduced new rules for improving the compliance and administration of taxes in this regard. Since these rules have changed how things are done, they could result in some nasty surprises for those who do not comply, so pay careful attention.

Certain exceptions apply

There are three main exceptions to the general rule where a gain on the sale of a principal residence is tax exempt:

  • Your property cannot be qualified as a principal residence for each of the years owned (e.g., due to the surface area of the land or because another property was designated as such for certain years by you or your spouse);
  • Your property was used, in whole or in part, to earn income;
  • You are selling a principal residence and have held the property for less than a year (early sale of a property).

Early sale of a property (or property flip)

Since January 1, 2023, an individual who sells a residential property that they have held for less than a year will be deemed to have earned business income rather than realized a capital gain. As a result, the profit gained from the sale will be taxable at 100% rather than 50% and will not qualify for the primary residence exemption.

The exceptions to this rule include the following events: death, separation, serious disability or illness, change of employer and involuntary disposition (resulting from a fire or expropriation, for example).

Your obligations

As long as you lived in your residence in each of the years that you owned it and if you or your spouse did not own any other property that could be qualified as a principal residence and the residential property rule does not apply, the gain will be entirely exempt and no tax will be payable. Up to here, nothing has changed.

However, you can no longer sell your residence without notifying the tax authorities. Since 2016, you must comply with disclosure obligations if you disposed of your residence during the year.

At the very least, you must complete the prescribed forms (T2091 and TP-274) and designate the property in Schedule 3 of your income tax return. You must also specify the year of acquisition, sale price and description of the property sold in the prescribed forms.

Additionally, if the property sold cannot be designated as your principal residence for each of the years you owned it, you will have to complete the prescribed forms in detail to calculate the tax-exempt and taxable portions.

Don’t forget to declare the sale, otherwise…

Unless you declare the sale of your residence during the year, you will not be able to benefit from the exemption for a principal residence, such that the profit realized (called capital gain) will be taxable.

If you neglect to declare the disposal of your property and to designate it as a principal residence in the year it was sold, you could request to amend your income tax return. Please note that the tax authorities may grant the right to file a late designation in certain situations, but a penalty may apply. This penalty will correspond to the lesser of the following two amounts:

  • $100 per late month calculated since the filing deadline for the sale year;
  • $8,000.

Furthermore, individuals who have not reported the sale could be in for another surprise. The period during which the the tax authorities can issue a new assessment (which is currently three years) will be indefinitely extended. The tax authorities will therefore have all the time needed to ask questions.

Reminder: procedure to follow when selling your principal residence

  • Make sure you satisfy all the criteria for designating the property sold as a principal residence for each of the years.
  • Make sure that you are not subject to the rules regarding early sale of residential properties.
  • Make sure you comply with the new disclosure requirements in order to benefit from the exemption for a principal residence.
  • If you forget to declare the sale of your principal residence, consider notifying the tax authorities and paying the penalty applicable. It could be less costly than the capital gains tax.
  • Remember: keeping track of the cost of your property and related improvements will help you make the best choice at the time of the sale and reduce your tax bill if you or your spouse held more than one property for the same period.
  • Specific rules apply if you’re a non-resident of Canada or if you hold a residence in a personal trust.

To avoid nasty surprises, you should consult a tax specialist.

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